A Lesson in Beerconomics - Widmer Brothers Grows and Declines

By Chad Pilbeam |
June 6, 2012 |
0 Comments |

Beer needs to be reclassified from a luxury or disposable income purchase to that of a necessity. And as a necessity, beer is “recession-proof”. How else do you explain growth of over 2,000 U.S. breweries in this economy and the expansion of some of America’s most mature and tenured breweries during a time when so many new-comers are entering the industry? You can’t. People need their beer, and the economics of it would drive a more conservative industry’s chief financial officer to “pucker”.

Widmer Brothers Brewing, founded in 1984 and a pioneer of the craft beer movement, almost single-handedly gave U.S. beer drinkers a palate for wheat beer. Their unfiltered wheat (Hefeweizen) is credited by many as being the standard by which all others are judged, and arguably the motivation for wheat beer market’s broad offerings. But amidst these claims to success, Widmer’s share of the wheat beer market is on the decline. Hefeweizen, which makes up approximately 60% of the Widmer brand’s revenue, is being displaced in the local bar and tavern – an arena where the brand has experienced much success.

Brewery co-founder Rob Widmer admits that they pretty much had the market to themselves, but now the wheat beer market is filled with competition. Said Widmer, “Imitation is a high form of flattery.”

Few with so much invested in one product would share that optimism, and even fewer would view the positive perspective of one’s competitions’ success at their expense. However, Hefeweizen isn’t Widmer’s only bet and the recent change in the Portland-based brewery’s landscape is proof.

Despite the core-product’s decline and an overall brand decline of nearly 5% from peak shipments in 2009 through the end of last year, Widmer is expanding. Last week the company spent more than $3.0 million upping the brewery’s production capabilities by 140,000 barrels, an increase in capacity by nearly 25%. Again, the CFO in your company might need a beer just to “keep their spurs from jingling and jangling”, but the beerconomics of this landmark brand reminds us of what any good investor should do - diversify your portfolio and adapt to market conditions.

Widmer is the progeny of parent company Craft Brew Alliance. Additionally, Anheuser-InBev (the world’s largest brewer) has a 32% stake in the alliance, ensuring that the company is well funded. Not resting on their laurels or relying on “mom and dad” to keep pumping cash into them, Widmer will diversify by brewing 23 different beers over the next year and is repositioning Hefeweizen with 12-packs. Are they conceding the taps to other brewers? Not likely. But the beerconomics lesson here demonstrates adaptation investors like to see, and a product mix that increases sustainability.

Strength in numbers. The Craft Brew Alliance brands also include Kona Brewing Company and Redhook Ale Brewery. Earlier this year Beer-Universe reported the financial success of the alliance, and as of May 24th the company’s stock was up $1.91 (30%) from the first of the year. With a “go-forth and prosper” mentality, the brewery continues to give investors confidence through expansion, diversification, and investment in other trends. The alliance has already started canning some of their beers, a newer movement that seems to be gaining popularity, and earlier this year they released Omission, a low-gluten beer. All seems well for the brand monetarily, but a recent ruling on Omission’s gluten-free status may have soured some of the financials.

Last year Beer Universe covered the story on market potential and demand for gluten-free beers, and many brewers have since followed, introducing their own version. Despite having the gluten removed during the brew process, Omission is unable to be classified as “gluten-free”. The recent ruling states that because the ingredients used to make Omission originally contain gluten, it cannot claim “gluten-free” status. Since the ruling on the 24th of May, the stock has dropped almost 10% (closed at $7.46 on June 6th).

Contrary to economics, Widmer’s application of beerconomics demonstrates financial success by investing in a declining brand. Comprising 1/3rd of the 9th largest U.S. brewery (the alliance), they know all too well that recent performance is no indication of long-term profitability. As a pioneer they survived when a market for craft beer didn’t exist. In the 90’s there was the craft beer bubble which popped, prompting many to close their doors, and still they survived. Buyouts, change in ownership, a declining economy, a hoard of new competitors, even a ruling on their latest product that didn’t show them favor, and still Widmer shows us practical lessons of economics with not only an injection of capital, but a tasty, tasty product that has survived tumultuous market conditions.

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